Investors looking for geographical diversification in their portfolio can consider investing in international markets through International mutual funds which invest in equities of a region or country, or fixed income securities. There are basically 3 kinds of such funds in India at the moment:
- “Hybrid International funds” allocate at least 65 per cent of their portfolios to domestic equities, and up to 35 per cent of their portfolios into international stocks.
- ‘Feeder funds “ collect funds locally and deploy them internationally, completely into foreign stocks of a specific region
- Thematic funds- Funds investing into sectoral themes like Gold Mining, Agriculture , Energy etc.
WHY SHOULD ONE GO FOR INTERNATIONAL MUTUAL FUNDS?
Investing in international mutual funds helps serve the purpose of diversification especially as you may get exposure to themes that do not exist in India at the moment.
International funds invest in shares and stocks of companies outside the investor’s home country, giving excellent portfolio diversification and hedging risk by spreading it over a blend of geographies.
For instance, Principal Global Opportunities Fund, a locally managed international mutual fund, deploys all of its assets into Principal Global Investors Emerging Market Equity, a fund that predominantly invests into Greater China and the Latin Americas.
A properly selected International Fund can help balance out the risk in your portfolio by hedging you against a fall in the Rupee versus the Dollar.
If you’re a savvy investor with a keen understanding of how domestic and global equity markets work, you could consider a 10 per cent allocation to International Funds.
THE RISKS
One of the risks associated with investing in international funds is currency risk. If rupee strengthens, then it erodes your returns vis-à-vis a pure domestic investment.
If you are investing into country or region-specific funds, then you could be exposed to specific country/geopolitical risks.
Another negative is the unfavourable tax treatment for international equity funds- for tax purposes they are classified as non-equity, thus investors end up paying a capital gains tax which is higher compared to domestic equity funds.
Contact us at mfss@plindia.com for further information or analysis of these funds